CoBank District 2016 Financial Information

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3 CoBank District 2016 Financial Information

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5 Introduction and District Overview CoBank, ACB (CoBank, the Bank, we, our, or us) is one of the four banks of the Farm Credit System (System) and provides loans, leases and other financial services to support agriculture, rural infrastructure and rural communities across the United States. The System is a federally chartered network of borrower-owned lending institutions composed of cooperatives and related service organizations. The System was established in 1916 by the U.S. Congress, and is a Government Sponsored Enterprise. CoBank is federally chartered under the Farm Credit Act of 1971, as amended (the Farm Credit Act), and is subject to supervision, examination, and safety and soundness regulation by an independent federal agency, the Farm Credit Administration (FCA). We are cooperatively owned by our U.S. customers. Our customers consist of agricultural cooperatives; other food and agribusiness companies; rural power, communications and water cooperatives and companies; rural community facilities; farmer-owned financial institutions including Agricultural Credit Associations and Federal Land Credit Associations (Associations); and other businesses that serve agriculture and rural communities. The Associations originate and service long-term real estate mortgage loans as well as short- and intermediate-term loans for agricultural purposes. The Associations may also purchase eligible loan participations from System entities and other lending institutions. Additionally, the Associations serve as an intermediary in offering multi-peril crop insurance and credit life insurance, and providing additional financial services to borrowers. We are chartered by the FCA to serve the Associations that provide credit and related financial services to or for the benefit of eligible borrowers/shareholders for qualified purposes in specific geographic areas in the United States. We collectively refer to these entities as our affiliated Associations. Associations are not authorized by the Farm Credit Act to participate in the issuance of Systemwide bonds, medium term notes and discount notes (collectively referred to as Systemwide Debt Securities). Therefore, we are the primary funding source for our affiliated Associations. As of January 1, 2017, we have 23 affiliated Associations serving customers in 23 states across the Northwest, West, Southwest, Rocky Mountains, Mid-Plains, and Northeast regions of the United States. Our affiliated Associations are considered customers and thus operate independently and maintain an arms-length relationship with us, except to the extent that the Farm Credit Act requires us, as the funding bank, to monitor and approve certain activities of these Associations. Accordingly, the financial information of affiliated Associations is not included in the consolidated financial statements presented in CoBank s 2016 Annual Report to Shareholders (the Annual Report). However, because of the interdependent manner in which CoBank and our affiliated Associations operate, we believe that presenting combined Bank and Association financial information is meaningful for purposes of additional analysis. CoBank and its affiliated Associations operate under a debtor-creditor relationship evidenced by a General Financing Agreement (GFA) entered into separately with each Association. The GFA sets forth the business relationship between us and each Association and also references certain requirements contained in the Farm Credit Act and FCA regulations. The Associations respective boards of directors are expected to establish and monitor the necessary policies and procedures to comply with all FCA regulations. In all other respects, the lending relationship with the Associations is substantially similar to that with our other borrowers. We make loans to the Associations, which, in turn, make loans to their eligible borrowers. We have senior secured interests in substantially all of the Associations assets, which extend to the underlying collateral of the Associations loans to their customers. Total loans outstanding to our affiliated Associations was $41.5 billion at December 31, During 2016, $92.3 billion of advances on loans were made to our affiliated Associations and repayments totaled $89.9 billion. We have no direct access to Association capital. Our bylaws permit our Board of Directors to set the target equity level for Association investment in the Bank within a range of 4 to 6 percent of the one-year historical average of Association borrowings. In 2016, the required investment level was 4 percent. There are no capital sharing agreements between us and our affiliated Associations. The Financial Highlights, Management s Discussion and Analysis and the Condensed Combined Income Statements and Balance Sheets included on the following pages present unaudited combined financial information and related analysis of CoBank and its affiliated Associations, which are collectively referred to as the District. As part of the combining process, all significant transactions between CoBank and the Associations, including loans made by the Bank to the affiliated Associations and the interest income/interest expense related thereto, and investments of the affiliated Associations in the Bank and the earnings related thereto, have been eliminated. Farm Credit Services Southwest, ACA Matter In 2014, one of our affiliated Associations, Farm Credit Services Southwest, ACA (FCSSW), noted a sudden significant increase in delinquencies in a discrete portion of its retail lending portfolio. An in-depth investigation directed by a special investigative committee of the FCSSW board of directors identified material weaknesses in internal controls relating to credit origination, administration, servicing and cash management procedures. As a result, it was determined 1

6 that certain loans were made to ineligible borrowers under the Farm Credit Act and/or were inadequately secured. In October 2014, the board of directors and management of FCSSW announced that FCSSW s financial statements as of and for the year ended December 31, 2013, and the prior years included therein, as well as the three months ended March 31, 2014 and the six months ended June 30, 2014 could no longer be relied upon. In July 2015, FCSSW published restated financial reports for the above-mentioned periods. Effective November 1, 2015, FCSSW became a wholly-owned subsidiary of Farm Credit West, ACA, another of our affiliated Associations. As a result of the matters described above, the District s unaudited, condensed combined financial statements for the year ended December 31, 2014 include out-of-period adjustments to the provision for loan losses of $47.0 million, charge-offs of $42.0 million and the transfer of $62.0 million in loans to nonaccrual status, $20.0 million of which remained in nonaccrual loans at year-end The District s unaudited, condensed combined financial statements for the year ended December 31, 2015 include out-of-period adjustments to the provision for loan losses of $2.4 million and the transfer of $4.7 million in loans to nonaccrual status. Such errors are not material to the historical District unaudited, condensed combined financial statements. Financial Highlights ($ in Thousands) As of December 31, Total Loans $ 104,778,598 $ 98,382,641 $ 89,132,415 Less: Allowance for Loan Losses 855, , ,257 Net Loans 103,923,279 97,637,119 88,383,158 Total Assets 136,536, ,644, ,918,704 Total Shareholders' Equity 17,339,280 16,127,219 15,139,164 Year Ended December 31, Net Interest Income $ 2,750,262 $ 2,570,513 $ 2,451,105 Provision for Loan Losses 112,397 28,452 32,972 Net Fee Income 138, , ,408 Net Income 1,697,810 1,667,019 1,577,755 Net Interest Margin 2.14 % 2.22 % 2.26 % Return on Average Assets Return on Average Total Shareholders' Equity Average Loans $ 101,163,012 $ 92,245,347 $ 85,030,096 Average Earning Assets 128,754, ,611, ,563,098 Average Assets 131,180, ,832, ,748,032 2

7 Management s Discussion and Analysis of District Results of Operations and Financial Condition Average loan volume in the District increased 10 percent to $101.2 billion in 2016 compared to $92.2 billion in The increase in average loan volume primarily reflected growth in real estate mortgage, agribusiness, rural power, and wholesale lending to associations outside of the District. District net income increased by $30.8 million to $1,698 million in 2016, from $1,667 million in The increase in earnings resulted from greater net interest income and, to a lesser extent, greater noninterest income and a lower provision for income taxes. These factors were partially offset by an increase in operating expenses, including an increase in Farm Credit Insurance Fund (Insurance Fund) premiums, and a higher provision for loan losses in District net interest income increased 7 percent to $2,750 million in 2016 from $2,571 million in The increase in net interest income was driven by higher average loan volume and increased earnings on balance sheet positioning at CoBank. Lower spreads in lending portfolios, resulting from continued strong competition for the business of customers, and a higher cost of System short-term debt somewhat offset these factors and led to a decrease in the District s overall net interest margin to 2.14 percent in 2016 as compared to 2.22 percent in The District recorded a provision for loan losses of $112.4 million in 2016, compared to $28.5 million in CoBank recorded a provision for loan losses of $63.0 million in 2016 driven by increased exposure resulting from growth in overall lending activity and deterioration in credit quality in agribusiness loans. In 2015, CoBank recorded a provision for loan losses of $10.0 million primarily reflecting increased exposure resulting from growth in overall lending activity. The Associations recorded a net combined provision for loan losses of $49.4 million in 2016, compared to a net combined provision of $18.5 million in The net combined 2016 provision for loan losses at the Associations was primarily due to provisions recorded at several Associations resulting from higher loan volume as well as deterioration in credit quality driven by drought, commodity price volatility and other concerns impacting specific industries. The net combined 2015 provision for loan losses at the Associations was driven by a provision of $19.8 million recorded at one Association primarily due to deteriorating credit quality and increased loan volume. Noninterest income increased $22.6 million to $306.1 million in 2016 from $283.5 million in Noninterest income is primarily composed of fee income, loan prepayment income, patronage income and miscellaneous gains and losses, offset by losses on early extinguishments of debt. The higher level of noninterest income was driven by an increase in other noninterest income of $14.5 million primarily resulting from greater patronage income received from other System institutions on loan participations sold by CoBank. Fee income increased $10.6 million during 2016 due to an increase in fees at Associations. In addition, CoBank recorded only $0.8 million of other-than-temporary impairment losses on investment securities during 2016 while $11.1 million in such losses were recognized in These items were somewhat offset by an $18.0 million decrease in gains recognized on sales of investment securities. In the 2015 period, CoBank sold investment securities with a combined book value of $148.3 million for gains totaling $22.6 million. During 2016, sales of investment securities at CoBank with a combined book value of $879.5 million resulted in gains totaling $4.6 million. Total District operating expenses increased 10 percent to $1,082.4 million in 2016 from $981.3 million in Higher operating expenses included an increase in Farm Credit Insurance Fund (Insurance Fund) premium expense of $49.3 million, due to an increase in premium rates as well as growth in average loan volume. Insurance Fund premium rates are set by the Farm Credit System Insurance Corporation (Insurance Corporation) and were 16 basis points of average outstanding adjusted insured debt obligations during the first half of 2016 and 18 basis points for the second half of 2016, compared to 13 basis points for all of The increases in Insurance Fund premium rates resulted from growth in overall System assets and related debt obligations and the Insurance Corporation s projections for continued growth. Employee compensation expense increased $35.7 million to $583.3 million during The increase in employee compensation was primarily driven by a higher level of accrued incentive compensation reflective of strong business and financial performance, annual salary adjustments, a higher overall number of employees as well as salary continuance and other benefits for senior officers who left CoBank in Occupancy and equipment expenses increased $11.1 million due to higher costs relating to improvements and maintenance at certain Associations. Purchased services increased by $6.0 million and other operating expenses decreased by $6.8 million primarily due to a change in expense classification at one Association. Income tax expense decreased $13.4 million to $163.8 million in 2016 compared to $177.2 million in The income tax expense at the District predominantly relates to CoBank, as a substantial majority of the business activities at Associations are exempt from federal income tax. The decrease was driven by higher levels of accrued patronage, which resulted from growth in average patronage-eligible loan volume, an increase in earnings attributed to non-taxable business activities and an increase in tax credits related to renewable energy transactions. 3

8 Loan Portfolio The following table presents the District s outstanding loans classified in accordance with the FCA s loan types. ($ in Thousands) District Loans by Loan Type December 31, Real Estate Mortgage $ 30,616,520 $ 28,720,815 $ 26,584,467 Non-affiliated Associations 4,523,774 4,291,104 3,847,208 Production and Intermediate-term 14,620,321 13,866,604 13,091,451 Agribusiness: Loans to Cooperatives 12,791,227 11,790,613 11,411,523 Processing and Marketing Operations 8,866,980 8,225,584 7,202,571 Farm Related Businesses 1,599,249 1,701,660 1,603,071 Communications 3,837,402 4,042,813 3,388,172 Rural Power (1) 16,553,489 15,207,910 12,397,400 Water/Wastewater 1,657,205 1,447,650 1,274,346 Agricultural Export Finance 5,154,302 4,642,753 4,378,277 Rural Residential Real Estate 906, , ,057 Lease Receivables 3,537,075 3,375,203 2,965,287 Other 114, , ,585 Total $ 104,778,598 $ 98,382,641 $ 89,132,415 (1) In previous reports, these loans were described as 'Energy' loans. District loan volume increased $6.4 billion to $104.8 billion at December 31, 2016, compared to $98.4 billion at December 31, The increase was primarily due to an increase in real estate mortgage loans driven by growth at several Associations, a greater level of agribusiness loan volume at CoBank primarily due to higher levels of seasonal financing at many grain cooperatives and increased lending to food and agribusiness companies and an increase in rural power loans at CoBank due to increased lending to electric distribution and power supply customers. Production and intermediate-term loans and processing and marketing loans also contributed to the increase in loan volume primarily resulting from growth in lending in the forest products, cattle/beef production and a variety of other industries. 4

9 Portfolio Diversification The following tables present the District s combined loan portfolio by primary business/commodity and geographic distribution, as a percent of total loans for the periods presented. Distribution by Primary Business / Commodity Fruits, Nuts and Vegetables 14 % 14 % 13 % Farm Supply, Grain and Marketing Dairy Electric Distribution Forest Products Cattle International Lending Field Crops Except Grains Other Farm Credit Entities Generation and Transmission Livestock, Fish and Poultry Farm Related Business Services Leasing Rural Home Local Telephone Exchange Carriers Nursery, Greenhouse Other Total 100 % 100 % 100 % Geographic Distribution California 22 % 21 % 21 % Texas Kansas Washington New York Colorado Idaho Oklahoma Oregon Minnesota Illinois Iowa Other (less than 2 percent each for the current year) Total States 95 % 95 % 95 % Latin America Europe, Mideast and Africa Other International Total International 5 % 5 % 5 % Total 100 % 100 % 100 % 5

10 Loan Quality The following table presents loans, classified by management at the various District entities pursuant to the FCA s Uniform Loan Classification System, as a percent of total loans. District Loan Quality December 31, Acceptable % % % Special Mention Substandard Doubtful Loss Total % % % Overall District loan quality deteriorated modestly in 2016 however remained favorable, with over 95 percent of all loans in the highest category of credit quality. Credit risk in the District s loan portfolio is spread broadly among customers, industries and geographic territory. The District serves a diversified spectrum of borrowers up and down the agricultural value chain. Association retail loans in the District loan portfolio are concentrated in the Northwest, West, Southwest, Rocky Mountains, Mid-Plains, and Northeast regions of the United States. CoBank s retail loan portfolio extends across the United States, with moderate levels of concentration in the Midwest region of the country and in the farm supply, grain marketing, electric distribution, and generation and transmission sectors. Nonperforming assets (which consist of nonaccrual loans, accruing restructured loans, accruing loans 90 days or more past due and other property owned) totaled $637.7 million as of December 31, 2016 compared to $520.6 million at December 31, Nonaccrual loans increased by a net $78.3 million during 2016 driven by a net $50.4 million increase at CoBank resulting from credit quality deterioration impacting agribusiness customers, somewhat offset by activity related to three communications loans, of which one was returned to accruing status and the others were paid off. Nonaccrual loans at Associations increased by a net $27.9 million primarily related to nursery, sweeteners, farm supply, livestock, and dairy operations. Accruing restructured loans increased by $40.0 million to $96.3 million in 2016 due to a communications loan at CoBank returning to accruing status, somewhat offset by the payoff of a dairy loan and two cattle loans at Associations. Total accruing loans 90 days or more past due increased by $2.9 million during 2016 primarily due to increases at two Associations. Nonperforming assets represented 0.61 percent of total District loan volume and other property owned at December 31, 2016, compared to 0.53 percent at December 31, Nonaccrual loan volume, the largest component of nonperforming assets, represented 0.50 percent of total loans at December 31, 2016 compared to 0.45 percent of total loans at December 31, The following table displays the District s nonperforming assets for the periods presented. ($ in Thousands) Nonperforming Assets December 31, Nonaccrual Loans: Real Estate Mortgage $ 246,832 $ 196,925 $ 192,669 Production and Intermediate-term 89,060 81, ,328 Agribusiness 138,356 70,985 49,703 Communications - 71,983 56,685 Rural Power ,092 Rural Residential Real Estate 3,531 4,903 7,130 Lease Receivables 44,329 17,433 6,332 Total Nonaccrual Loans 522, , ,939 Accruing Restructured Loans: Real Estate Mortgage 27,886 34,403 45,985 Production and Intermediate-term 20,883 19,415 28,019 Communications 45, Rural Residential Real Estate 2,351 2,425 2,008 Mission Related Total Accruing Restructured Loans 96,264 56,243 76,083 Accruing Loans 90 Days or More Past Due: Real Estate Mortgage 5,185 2,333 4,537 Production and Intermediate-term 1,778 1,979 5,209 Agribusiness Rural Residential Real Estate Lease Receivables Total Accruing Loans 90 Days or More Past Due 7,977 5,056 10,083 Total Nonperforming Loans 626, , ,105 Other Property Owned 11,332 15,579 30,741 Total Nonperforming Assets $ 637,681 $ 520,641 $ 558,846 Nonaccrual Loans as a Percentage of Total Loans 0.50 % 0.45 % 0.50 % Nonperforming Assets as a Percentage of Total Loans and Other Property Owned Nonperforming Assets as a Percentage of Capital

11 The following tables present an aging of past due loans in the District for the periods presented. ($ in Thousands) Aging of Past Due Loans Days Past Due 90 Days or More Past Due Total Past Due Not Past Due or Less Than 30 Days Past Due Total Loans and Accrued Interest Recorded Investment >90 Days and Accruing Real Estate Mortgage $ 87,240 $ 134,852 $ 222,092 $ 30,706,743 $ 30,928,835 $ 5,185 Production and - Intermediate-term 55,008 54, ,518 14,610,072 14,719,590 1,778 Agribusiness 8,308 15,635 23,943 23,309,496 23,333, Communications ,848,157 3,848,157 - Rural Power ,624,010 16,624,010 - Water/Waste Water ,666,042 1,666,042 - Agricultural Export Finance ,168,136 5,168,136 - Rural Residential Real December 31, 2016 Estate 6,623 1,168 7, , ,532 - Lease Receivables 18,922 8,452 27,374 3,510,200 3,537, Non-affiliated Associations ,528,507 4,528,507 - Other , ,696 - Total $ 176,101 $ 214,617 $ 390,718 $ 104,987,800 $ 105,378,518 $ 7,977 ($ in Thousands) Aging of Past Due Loans Days Past Due 90 Days or More Past Due Total Past Due Not Past Due or Less Than 30 Days Past Due Total Loans and Accrued Interest Recorded Investment >90 Days and Accruing Real Estate Mortgage $ 54,185 $ 61,321 $ 115,506 $ 28,871,190 $ 28,986,696 $ 2,333 Production and Intermediate-term 31,072 24,444 55,516 13,896,350 13,951,866 1,979 Agribusiness 10,880 8,196 19,076 21,769,468 21,788,544 - Communications - 24,913 24,913 4,026,744 4,051,657 - Rural Power ,264,122 15,264,122 - Water/Waste Water ,455,953 1,455,953 - Agricultural Export Finance ,655,393 4,655,393 - Rural Residential Real December 31, 2015 Estate 6,845 2,020 8, , , Lease Receivables 13,209 2,418 15,627 3,360,021 3,375, Non-affiliated Associations ,294,025 4,294,025 - Other , ,512 - Total $ 116,191 $ 123,312 $ 239,503 $ 98,657,793 $ 98,897,296 $ 5,056 7

12 ($ in Thousands) Aging of Past Due Loans Days Past Due 90 Days or More Past Due Total Past Due Not Past Due or Less Than 30 Days Past Due Total Loans and Accrued Interest Recorded Investment >90 Days and Accruing Real Estate Mortgage $ 59,110 $ 55,028 $ 114,138 $ 26,713,611 $ 26,827,749 $ 4,537 Production and Intermediate-term 32,192 34,273 66,465 13,102,114 13,168,579 5,209 Agribusiness 1,751 8,110 9,861 20,270,079 20,279,940 - Communications - 1,138 1,138 3,393,996 3,395,134 - Rural Power - 21,039 21,039 12,426,120 12,447,159 - Water/Waste Water ,281,922 1,281,922 - Agricultural Export - Finance ,389,165 4,389,165 - Rural Residential Real - December 31, 2014 Estate 7,639 2,736 10, , , Lease Receivables 8,417 1,421 9,838 2,955,853 2,965, Non-affiliated Associations ,849,440 3,849,440 - Other , ,887 - Total $ 109,180 $ 123,745 $ 232,925 $ 89,364,526 $ 89,597,451 $ 10,083 Past due loans increased to $390.7 million as of December 31, 2016 compared to $239.5 million at December 31, 2015 primarily driven by increases in past due real estate mortgage and production and intermediate-term loans at Associations. District entities maintain an allowance for loan losses at a level consistent with the probable losses identified by management of each institution, considering such factors as current agricultural and economic conditions, loan loss experience, portfolio quality, and loan portfolio composition and concentrations. CoBank and certain Associations also maintain a reserve for unfunded commitments, which totaled $141.5 million at December 31, Although aggregated in the District s combined financial statements, the allowance for loan losses for each District entity is particular to that institution and is not available to absorb losses realized by other District entities. The allowance for loan losses at December 31, 2016 totaled $855.3 million compared to $745.5 million at December 31, Changes in the allowance included an overall provision for loan losses of $112.4 million, which is described on page 3, net charge-offs of $18.3 million, a $16.6 million net transfer from the reserve for unfunded commitments, and a $0.9 million reduction due to Association mergers. Gross charge-offs in 2016 were $27.5 million, of which $22.9 million related to activity at the Associations across a variety of industries. The remaining $4.6 million related to charge-offs at CoBank and were primarily associated with a small number of agribusiness customers. The following presents detailed changes in the allowance for loan losses in the District for the periods presented. 8

13 ($ in Thousands) Changes in Allowance for Loan Losses Balance at December 31, 2015 Charge-offs Recoveries Provision for Loan Losses/ (Loan Loss Reversal) Transfers (to) from Reserve for Unfunded Commitments Association Merger Impact Balance at December 31, 2016 Real Estate Mortgage $ 105,155 $ (1,274) $ 804 $ 15,146 $ 5,999 $ (562) $ 125,268 Production and Intermediate-term 129,219 (18,000) 4,388 39,551 1,519 (344) 156,333 Agribusiness 271,873 (4,980) 1,619 57,965 10,113 (2) 336,588 Communications 53,345 (324) 1,135 (13,827) ,564 Rural Power 121, ,831 (1,057) - 124,026 Water/Waste Water 10, ,180 (102) - 11,724 Agricultural Export Finance 11, ,960 (91) - 14,216 Rural Residential Real Estate 5,666 (265) 3 (907) - - 4,497 Lease Receivables and Other 36,920 (2,614) 299 7, ,103 Total $ 745,522 $ (27,457) $ 9,149 $ 112,397 $ 16,616 $ (908) $ 855,319 Balance at December 31, 2014 Charge-offs Recoveries Provision for Loan Losses/ (Loan Loss Reversal) Transfers (to) from Reserve for Unfunded Commitments Association Merger Impact Balance at December 31, 2015 Real Estate Mortgage $ 111,585 $ (1,901) $ 1,356 $ 1,979 $ (2,696) $ (5,168) $ 105,155 Production and Intermediate-term 142,835 (9,817) 10,225 (7,854) 1,631 (7,801) 129,219 Agribusiness 284,727 (12,297) 2,799 (15,034) 11,817 (139) 271,873 Communications 54, (998) (695) - 53,345 Rural Power 98,149 (5,596) ,376 (12,958) - 121,405 Water/Waste Water 9, ,988 (1,174) (1) 10,646 Agricultural Export Finance 8, ,259 (53) - 11,293 Rural Residential Real Estate 6,216 (430) 153 (273) - - 5,666 Lease Receivables and Other 32,576 (1,075) 422 5,009 - (12) 36,920 Total $ 749,257 $ (31,116) $ 16,178 $ 28,452 $ (4,128) $ (13,121) $ 745,522 Balance at December 31, 2013 Charge-offs Recoveries Provision for Loan Losses/ (Loan Loss Reversal) Transfers (to) from Reserve for Unfunded Commitments Association Merger Impact Balance at December 31, 2014 Real Estate Mortgage $ 103,685 $ (1,557) $ 1,833 $ 31,891 $ (22,444) $ (1,823) $ 111,585 Production and Intermediate-term 182,301 (51,972) 8,518 6, (3,542) 142,835 Agribusiness 233,062 (1,396) 3,274 44,826 5,883 (922) 284,727 Communications 64,930 (4,087) 1,189 (11,748) 4,150 (2) 54,432 Rural Power 97,354 (531) 106 (35,422) 36,644 (2) 98,149 Water/Waste Water 9, (3,505) 3,893-9,813 Agricultural Export Finance 7, ,524 (93) - 8,924 Rural Residential Real Estate 6,671 (408) 16 (50) - (13) 6,216 Lease Receivables and Other 34,878 (1,333) 418 (1,386) - (1) 32,576 Total $ 739,745 $ (61,284) $ 15,408 $ 32,972 $ 28,721 $ (6,305) $ 749,257 9

14 District Capital Resources Combined District shareholders equity at December 31, 2016 totaled $17.3 billion, a net increase of $1.2 billion as compared to $16.1 billion at December 31, The increase primarily resulted from District net income of $1,698 million, the issuance of preferred stock at CoBank, as discussed below, and the net issuance of CoBank common stock of $75.4 million. These factors were somewhat offset by accrued patronage of $726.7 million, additional other comprehensive loss of $86.4 million, preferred stock dividends of $85.6 million and a decrease in Association preferred stock of $34.0 million. On April 8, 2016, CoBank issued $375.0 million of Series I non-cumulative perpetual preferred stock. Dividends on Series I preferred stock, if declared by the Board of Directors in its sole discretion, are non-cumulative and are payable semi-annually at a fixed annual rate equal to 6.25 percent from the date of issuance up to, but excluding, October 1, Thereafter, dividends will accrue at an annual rate equal to the 3-month USD LIBOR plus 4.66 percent and will be payable quarterly. The components of the District s accumulated other comprehensive loss are detailed in the following table. ($ in Thousands) Accumulated Other Comprehensive Loss December 31, Unrealized (Losses) Gains on Investment Securities $ (13,054) $ 48,754 $ 94,454 Net Pension Adjustment (369,209) (342,188) (327,259) Unrealized Losses on Interest Rate Swaps and Other Financial Instruments (37,707) (40,157) (33,460) Accumulated Other Comprehensive Loss $ (419,970) $ (333,591) $ (266,265) The increase in the District s total accumulated other comprehensive loss in 2016 primarily relates to the change in unrealized gains/losses on CoBank s investment securities driven by interest rate fluctuations as well as changes in pension-related values driven by changes in underlying assumptions. The following table presents regulatory capital ratios for CoBank and the range of ratios at the affiliated Associations. District Capital Ratios Permanent Capital Ratio Total Surplus Ratio Core Surplus Ratio Permanent Capital Ratio Total Surplus Ratio Core Surplus Ratio Permanent Capital Ratio Total Surplus Ratio Core Surplus Ratio CoBank 15.47% 14.52% 11.02% 14.95% 14.07% 10.29% 15.70% 14.81% 10.47% Associations % % % % % % % % % Regulatory December 31, 2016 December 31, 2015 December 31, 2014 Minimum 7.00% 7.00% 3.50% 7.00% 7.00% 3.50% 7.00% 7.00% 3.50% As depicted in the table above, at December 31, 2016, CoBank and all affiliated Associations exceeded the FCA s regulatory minimum capital ratios. Although aggregated in the District s condensed financial statements, capital for each District entity is particular to that institution. In addition, the provisions of joint and several liability for Systemwide Debt Securities are applicable only to System banks and do not include Associations. CoBank has limited access to Association capital. There are no capital sharing agreements between CoBank and its affiliated Associations. 10

15 Association Mergers and Other Matters Effective January 1, 2014, two Association mergers occurred in the CoBank District. The Federal Land Bank Association of Kingsburg, FLCA and Northern California Farm Credit, ACA, merged to form Golden State Farm Credit, ACA. Additionally, Farm Credit of Maine, ACA merged into Farm Credit East, ACA. Effective October 1, 2014, Farm Credit of Central Oklahoma, ACA, merged into Farm Credit of Western Oklahoma, ACA. Effective January 1, 2015, Frontier Farm Credit (Frontier), one of our affiliated Associations, and Farm Credit Services of America (FCSAmerica), an Association affiliated with AgriBank, FCB, formed a strategic alliance. As part of the alliance, Frontier and FCSAmerica have integrated their day-to-day business operations, systems and leadership teams while continuing to exist as separate Associations. Each Association has its own board, with representatives participating in a coordinating committee to facilitate board governance between the two organizations. CoBank continues to serve as the funding bank for Frontier. As previously described, effective November 1, 2015, FCSSW became a wholly-owned subsidiary of Farm Credit West, ACA, another of our affiliated Associations. Effective January 1, 2016, two affiliated Associations, Farm Credit Services of East Central Oklahoma, ACA, and Chisholm Trail Farm Credit, ACA, merged to form Oklahoma AgCredit, ACA. On June 13, 2016, a lawsuit was commenced by the filing of a complaint in the United States District Court Southern District of New York against CoBank by a number of investors (the Plaintiffs ) who had held CoBank s percent Subordinated Notes due in 2018 (the Notes ). The Notes were redeemed at par plus accrued interest by CoBank on April 15, 2016 due to the occurrence of a Regulatory Event (as defined under the terms of the Notes). The Plaintiffs have asserted a breach of contract claim and a breach of implied covenant of good faith and fair dealing claim alleging that CoBank impermissibly redeemed the Notes. The Plaintiffs have requested damages in an amount to be determined at trial, reasonable attorneys fees and any other such relief as the court may deem just and proper. CoBank filed its answer on September 20, 2016 and discovery is ongoing. CoBank intends to vigorously defend against these allegations. The likelihood of any outcome of this proceeding cannot be determined at this time. Effective January 1, 2017, two of our affiliated Associations, Farm Credit of Southwest Kansas, ACA, and American AgCredit, ACA, merged and are doing business as American AgCredit, ACA. During 2016, these two entities operated under a joint management agreement pursuant to which the President and Chief Executive Officer (CEO) of American AgCredit, ACA, served as the CEO of both Associations. Effective January 1, 2017, two of our affiliated Associations, Farm Credit of Ness City, FLCA (Ness City) and High Plains Farm Credit, ACA (High Plains), entered into a joint management agreement with the intent to merge. Pursuant with the agreement, the CEO, Chief Financial Officer and Chief Credit Officer of High Plains will jointly serve in these positions for Ness City. The anticipated merger date is October 1, The merger will be subject to the approval of the stockholders of both Associations as well as the FCA. 11

16 Condensed Combined Statements of Income (unaudited) ($ in Thousands) Year Ended December 31, Interest Income Loans $ 3,555,419 $ 3,141,004 $ 2,937,598 Investment Securities, Federal Funds Sold and Other Overnight Funds 442, , ,144 Total Interest Income 3,998,144 3,509,055 3,297,742 Interest Expense 1,247, , ,637 Net Interest Income 2,750,262 2,570,513 2,451,105 Provision for Loan Losses 112,397 28,452 32,972 Net Interest Income After Provision for Loan Losses 2,637,865 2,542,061 2,418,133 Noninterest Income Net Fee Income 138, , ,408 Prepayment Income 34,184 32,230 26,269 Losses on Early Extinguishment of Debt (34,197) (37,455) (58,316) Gains on Sale of Investment Securities 4,617 22,603 4,206 Other-Than-Temporary Impairment Losses on Investment Securities (750) (11,100) - Other, Net 163, , ,635 Total Noninterest Income 306, , ,202 Operating Expenses Employee Compensation 583, , ,990 General and Administrative 71,894 71,759 73,004 Information Technology 64,406 62,810 58,032 Insurance Fund Premium 153, ,065 88,517 Farm Credit System Related 28,745 24,695 26,192 Occupancy and Equipment 64,842 53,726 45,961 Purchased Services 59,396 53,348 53,129 Other 56,496 63,323 47,671 Total Operating Expenses 1,082, , ,496 Income Before Income Taxes 1,861,571 1,844,261 1,750,839 Provision for Income Taxes 163, , ,084 Net Income $ 1,697,810 $ 1,667,019 $ 1,577,755 12

17 Condensed Combined Balance Sheets (unaudited) ($ in Thousands) As of December 31, Assets Total Loans $ 104,778,598 $ 98,382,641 $ 89,132,415 Less: Allowance for Loan Losses 855, , ,257 Net Loans 103,923,279 97,637,119 88,383,158 Cash and Cash Equivalents 1,877,756 3,311,777 2,071,427 Federal Funds Sold and Other Overnight Funds 750, Investment Securities 27,903,362 24,670,926 24,529,619 Interest Rate Swaps and Other Financial Instruments 204, , ,530 Accrued Interest Receivable and Other Assets 1,877,885 1,729,693 1,479,970 Total Assets $ 136,536,716 $ 127,644,371 $ 116,918,704 Liabilities Bonds and Notes $ 116,071,661 $ 108,052,092 $ 98,740,184 Subordinated Debt 498, , ,205 Interest Rate Swaps and Other Financial Instruments 162, , ,228 Reserve for Unfunded Commitments 141, , ,058 Accrued Interest Payable and Other Liabilities 2,323,003 2,291,680 1,871,865 Total Liabilities 119,197, ,517, ,779,540 Shareholders Equity Preferred Stock Issued by Bank 1,500,000 1,125,000 1,125,000 Preferred Stock Issued by Associations 518, , ,020 Common Stock 1,458,138 1,382,758 1,325,998 Paid In Capital 1,083,693 1,028, ,823 Unallocated Retained Earnings 13,199,306 12,372,772 11,561,588 Accumulated Other Comprehensive Loss (419,970) (333,591) (266,265) Total Shareholders Equity 17,339,280 16,127,219 15,139,164 Total Liabilities and Shareholders Equity $ 136,536,716 $ 127,644,371 $ 116,918,704 13

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20 6340 SOUTH FIDDLERS GREEN CIRCLE GREENWOOD VILLAGE, COLORADO